Spotify Technology S.A.

Good day and welcome to Spotify's fourth quarter 2025 earnings call and webcast. All participants are on a listen-only mode. If you require operator assistance at any time, please press star zero. As a reminder, this conference call is being recorded. I would now like to turn the call over to Brian Goldberg, head of investor relations. Thank you. Please go ahead.

Thanks, operator, and welcome to Spotify's fourth quarter 2026 earnings conference call. Joining us today will be our founder and executive chairman, Daniel Ek, our co-CEOs, Alex Nordstrom and Gustav Soderstrom, and our CFO, Christian Luiga. We'll start with opening comments from the team, and afterwards, we'll be happy to answer your questions. Questions can be submitted by going to slido.com, S-L-I-D-O.com, and using the code hashtag SpotifyEarningsQ425. Analysts can ask questions directly into Slido and all participants can then vote on the questions they find the most relevant. If for some reason you don't have access to Slido, you can email investorrelations at ir at spotify.com and we'll add in your question. Before we begin, let me quickly cover the safe harbor. During this call, we'll be making certain forward-looking statements including projections or estimates about the future performance of the company. These statements are based on current expectations and assumptions that are subject to risks and uncertainties. Actual results could differ materially because of factors discussed in today's call, in our shareholder deck, and in filings with the Securities and Exchange Commission. During this call, we'll also refer to certain non-IFRS financial measures. Reconciliations between our IFRS and non-IFRS financial measures can be found in our shareholder deck, in the financial section of our investor relations website, and also furnished today on Form 6K. And with that, I'll turn it over to Daniel. Daniel.

All right. Hey, everyone, and thanks for joining. As a short counting exercise has just shown me, this is my 30-second earnings call. And as you know, this was the last one that I did in the role as CEO. Alex, Gustav, and Christian will give you an overview of the business and cover the quarter. But before I hand it over, I wanted to share a few thoughts. First, I want to say gratitude to the incredible teams at Spotify, to the artists, creators, and authors we build for. The more than three quarters of billion people listen with us daily. Thank you. And thank you to all of you as well. I can say that I've generally valued these conversations with our investors, with analysts, and even the tough questions. Getting to build a company like this and to share that journey with people who care about where it's going, it's been a real privilege. From day one, our focus has been simple. Build the best experience for listeners, be the best partner for artists and creators, and do it in a way that scales globally. And that remains true almost 20 years in. And for those participating on the call, I know a huge portion of your role is scoring the companies you cover. So if you want a framework for evaluating Spotify going forward and what to hold us accountable to, I'd point to three key things. And then you must also layer on the culture that makes them possible. First, we saw problems at the intersection of consumers and creators. This is where we focus. If something is good for the consumer, and also good for the creator, that's where you'll find us. Every time. Discovery Weekly, Wrapped, Spotify for Artists, our new mobile free tier, these aren't just features, they're proof points. We build tools that help artists reach listeners they'd never find otherwise, and in turn, help listeners discover music they didn't know they'd love. And we built an ecosystem where artists, listeners, creators, authors, and advertisers reinforce each other. That intersection is where we've always won, and it's where the next decade gets built. Second, we are first and foremost a technology company. We've said for years that we aim to be the R&D arm for the music industry. And if I may say so, nearly 20 years in, I think we've earned that. We drove the shift from downloads to streaming and subscription, and we proved the model could work at scale. But here's what excites me the most. Our capabilities now extend far beyond music. Today, what we built is a technology platform for audio, and increasingly for all the ways creators connect with audiences. And this identity will matter even more going forward. The next wave of technology shifts, AI, new interfaces, wearables, new ways of interacting with content, these will reshape how people discover and experience audio and media. The hard problems I had in music, in podcasts, in books, in video, in live, and in things we haven't even built yet, we're going to keep building the technology to solve them. Third, we play the long game. When we went public in 2018, I talked about long-term value creation. While I know many of you focus quarter to quarter, that's not how we grade ourselves, and it's never have been. We choose growth over profitability for many years, and I know that was painful for some of you, but in order to scale, it was the right thing for consumers and creators, and ultimately for the business we're running today. We acquired Echonest back in 2014, when most people didn't understand why a streaming company needed a machine learning AI company. and that bet gave us personalization something that's now core to everything we do we built our ubiquity play that's called spotify connect starting in 2011 right as we launched in the us at the time every major tech platform was building their own wall garden for audio the conventional wisdom was pick an ecosystem and live inside it we bet the other way we decided spotify should work everywhere in your car your speaker your tv your gaming console regardless of whose ecosystem you're in. Apples, Googles, Amazon, Samsung, Sonos, all of them seamlessly. And today, Spotify works across more than 2,000 devices from over 200 brands. And you can start a song on your phone and you can finish it on your TV. That doesn't happen by accident. It happens because we choose ubiquity over control, openness over lock-in, and we stuck with it for over a decade. These weren't obvious calls at the time, but they compound, and that long-term orientation will continue to guide Spotify. Which brings me to talent, because we take a long-term view there too. At Spotify, we built a culture that tries to build and reward trust. Trust to take risks, trust to fail and learn, trust to challenge each other, and share the thinking behind our decisions. And here's why that matters. Moving fast isn't just about how much you ship. It's about shipping the right things. A culture of trust gives you both. People dare to try, but they also dare to debate, to push back, to find a better path together. That's how you iterate quickly without losing direction. If there's trust, most processes are easy, allowing you to move very fast. A culture of trust is hard to replicate. It is why we develop leaders from within. And I think Alex and Gustav are great proofs of this. They've been at the center of nearly every major shift in this company. Mobile, subscription, machine learning, podcast, audiobooks, marketplace, etc., etc. They didn't inherit Spotify. They really helped building it. And of course, I'm not going anywhere. I'll be here as executive chairman, focus on the long term. But this is their moment to lead. And I have deep confidence in them, not because everything will go perfectly. Of course it won't. But because I've watched them solve problems that looked impossible and then do it again and again. And they're not here to protect what I built. They're here to build what we haven't imagined yet. And their success is our success, and I'm rooting very hard for them. And with that, I'm going to hand it over to Alex, Gustav, and Christian.

Thank you, Daniel. Congratulations on a legendary run. Wow. Both Gustav and I thank you for the encouraging words and your trust. And now we closed out what we dubbed as the year of accelerated execution with another solid quarter, delivering a strong finish to 2025. In Q4, we met or exceeded guidance across all the key metrics. We marked our highest quarter ever for MAU net additions. It's just incredible to think that we now serve over three quarters of a billion people around the world. Since going public, I have been touting the importance of our flywheel, and it all starts with MAU growth, which in turn fuels the growth of our overall business. A driver of MEU outperformance is Wrapped, which was also record-breaking this year. While we saw impressive engagement back in 2024, we also got feedback on the user experience. So this year, we turned up the dial, and the response was redeeming. At the end of the campaign, more than 300 million users engaged, which was up 20%, and we saw more than 630 million shares across social media, which is up 42%. Even more, day one of Wrapped marked the highest single day of subscriber intake in Spotify history. Lots of learnings and we take our responsibility seriously to deliver on this much-anticipated moment every year for our users. We're also driving significant business growth for creative industries, and in 2025, we paid out more than $11 billion to music rights holders, once again setting a global record for the highest annual payment from a single source. This takes us to nearly $70 billion since our founding. In podcasting, video podcast consumption on Spotify has increased by more than 90% since the launch of the Spotify Partner Program, or what we call SPP. There are now more than 530,000 video podcast shows on our platform. And I hope you all caught the watershed moment at the Golden Globes, where Spotify and The Ringer's Good Hang with Amy Poehler won the first ever Best Podcast Award. This milestone underscores podcasting's impact on culture, and we're proud to have been a key part of it. Now, rounding things out with audiobooks, we expanded audiobooks in premium to more markets where we're already finding some of the world's most passionate listeners. As we continue to scale this, leading global publishers have credited us with bringing in new listeners and driving double-digit growth in audiobooks. Now you should expect Gustav and I to continue to optimize for and be relentless about creating value for users. Because when people spend more days in a month with us, across more moments, more devices, and more verticals, it proves our product is working. It means our investments into personalization and AI are paying off. It means we're doing a great job sharing the art made by our artists, podcasters, and authors. What this ultimately translates into is greater engagement and retention, which unlocks more revenue growth. And as our revenue grows, we bring more value back to our partners, artists, and creators. And with scale comes more opportunity for innovation and margin expansion. Disciplined reinvestment of this pushes growth even further. This is our formula. Rinse and repeat. And as we've mentioned before, we have one of the greatest times in the world. That's because everyone has a relationship with music. And podcasts and audiobooks, it deepens that connection even further. We proudly count 3.5% of the world as subscribers. And there's still lots of room to grow. It's not implausible to imagine us converting 10 or even 15% of the world's population to subscribers. With strong performance across all metrics, including user growth, revenue, gross margin, operating income, and cash flow, I'm confident about our position. And I'm optimistic about 2026 and beyond. We expect continued healthy MEU and subs growth throughout the year, while maintaining our consistently low churn. We will also make further progress on driving top-line growth and expanding gross margin. In closing, you might be wondering about our focus for 2026. We are framing it as the year of raising ambition. We were founded to solve what we felt like the impossible, and ambition has been the driving force behind our success from our earliest days. And ambition will be a guiding principle of our next chapter. We are looking forward to telling you more about it at our investor day in May of this year. Though what I'm certain about is that Gustav will take the opportunity to tease some of that, hopefully not giving away all of it. And with that, I will pass it over to Gustav.

Thank you, Alex. I will try to contain myself. In 2025, we launched more than 50 new features and innovations. Shout out to Promptly Playlist, Page Match, about the song that all launched very recently, actually in the last few weeks. So I think it's fair to say that we more than delivered on our bold ambitions of last year, pushing every boundary and driving engagement even higher. Now, I think it's important to zoom out, as I know there's been a lot of commentary around AI over the last few weeks and actually last several months. Like any significant global shift, we know that there will be winners and losers. But there is no question in my mind that we will continue to be one of the big beneficiaries of AI. I'm expecting a lot of questions on AI in the Q&A, so let me share a bit more up front. My view is that new technology is seldom disruptive on its own. Significant disruption happens when new technologies enable new asymmetric business models. For example, this is what Spotify did to music downloads. This is what Uber did to taxi service. So the question everyone should be asking is, does this evolution create new business models? Or are we mostly just seeing new technologies? For example, in SaaS, there is currently a lot of fear that the perceived business model will be challenged by more outcome-based models, which is reasonable. However, in the consumer space that we are in, we believe the dominant business model will continue to be ads plus subscription. Both places where Spotify excels. This puts Spotify in an outstanding position because we already have the right business model. Our job then just becomes leveraging these new technologies to our benefit, which is something that we've done consistently for the last 18 years. Another reason that we are in a strong position is is that we have been building for this moment for some time. Back in 2021, we saw the potential of AI that would be able to think and speak at the level of a human. So we acquired AI voice platform Sonantic in 2022. And this put us on an early path to introduce agentic experiences to Spotify users. One example of this is the wildly popular Interactive DJ, which we introduced in 2023 and have continued to enhance since then. About 90 million subscribers have used iDJ so far, driving over 4 billion hours of time spent on Spotify. And this keeps growing. More recently, we also launched Prompted Playlist, a new tool that has instantly taken off with power users. So if Interactive DJ is the chat interface to Spotify where you can talk casually, Prompted Playlist is the deep research mode of Spotify. It lets you describe and set rules for your own personalized playlists, literally writing your own algorithm. It taps into your entire Spotify listening history. Reflecting not just current obsessions but the full arc of your music taste and integrates up-to-the-minute culture pulled from the internet. There is nothing else like it. So all of this teases the next evolution of Spotify. Delivering the world's most intelligent agentic media platform. One that you can literally talk to. That fully understands each individual listener and puts them in the driver's seat. It's about moving from a passive experience to an interactive one. This is a stark contrast to most media services today. Innovation like this drives retention and time spent on Spotify, enhancing customer LTVs and monetization potential. And the momentum is undeniable. Looking at the US alone, monthly streaming hours per user have grown more than 20% in the last five years. And we feel well positioned to make continued gains here. Another example of interactivity is the smashing success of our new mixing tools. We recently hit a milestone of 50 million mixed playlists, and listeners are now making more than 1 million transitions per day, building yet another unique data set that improves our experience. People don't just want to listen. They want to actively participate in the music. They want to shape it. This is now becoming possible in ways that were previously unimaginable. So on that note, there is obviously a lot of conversation around AI in music right now. So let me just share how we think about it. We see two distinct categories emerging. One, artists making original music from scratch and two, new versions of existing music like covers or remixes. The first category means a lot of net new music and more content than ever being delivered to Spotify. Importantly, a growing catalog has always been very good for us because it attracts new users, drives engagement, and builds fandoms. As more artists incorporate AI tools, the lines around making music are blurring. But while the music may be generated on various AI platforms, the point is that regardless of where the music is made, the cultural moment always happens on Spotify. That is where all music charts and finds an audience. This is because Spotify has long been the place that delivers both the largest reach and monetization opportunities. The second category is derivatives, new takes on existing music. Everything we see tells us listeners want to interact with their favorite music, and many artists want to let them, creating new revenue from their existing catalog. In other media, like movies and TV, existing IP is incredibly valuable. But in music, artists haven't had a real way to monetize existing catalog through AI. Because the absence of a rights framework has kept AI mostly focused on the first category, net new creation. We want to work with the industry to fix that. If you're an artist looking to unlock this potential upside, you'd want to do it on the world's leading music platform. Your fans and the largest royalty pool are already there. We have the technology and capabilities ready to unlock this in a way that is additive for both IP rights holders and Spotify. And as we've said before, we intend to do this in the right way, with artist support, not around them. In fact, many artists and industry partners see this opportunity, and we are already working with them on realizing it. With so much out there, you may be wondering if we can keep up this pace in shipping. In fact, we think we not only can, but we think we can increase it. We've been embracing and investing in this technology evolution for some time. And it's allowing us to move with much higher speed. As a concrete example, an engineer at Spotify on their morning commute from Slack on their cell phone can tell Claude to fix a bug or add a new feature to the iOS app. And once Claude finishes that work, the engineer then gets a new version of the app pushed to them on Slack on their phone so that he can then merge it to production. All before they even arrived at the office. We call the system internally Honk, and we've been told by key AI partners that our work here is industry leading. Now, as Daniel said in his remarks, we are a tech company, and we consider ourselves the R&D department for the music industry. Our job is to understand new technologies quickly and capture their potential, which we've done time and again. The entire industry stands to benefit from this paradigm shift, but we believe that those who embrace this change and move fast will benefit the most. Now I'll pass it over to Christian to take you through the numbers.

Thanks, Gustav, and thanks, everyone, for joining us. I'll cover the quarter four results and provide some perspective on our outlook. Unless otherwise noted, all reference growth metrics are presented on a year-on-year constant currency basis. Overall, we're pleased with our strong quarter four finish. Total revenue grew at an accelerated 13% to $4.5 billion. Premium revenue rose 14% versus 13% last quarter and was primarily driven by subscriber growth. Our advertising business grew 4% versus flat last quarter. On a like-for-like basis, excluding the effects of our podcast optimization strategies, we had roughly 7% advertising growth. We are encouraged by the progress we're seeing in terms of market adoption of our new advertising tools and continue to expect improved growth in the second half of 2026. Moving to profitability, gross margin came in at 33.1%, expanding just over 80 basis points year on year. Our art performance here was primarily driven by content cost favorability. Operating income of $701 million was $81 million above forecast, off which social charges had a positive impact of $67 million due to share price movements. The remaining variance to guidance was driven by the gross margin performance. Finally, free cash flow was $834 million in Q4, and we ended the quarter with $9.5 billion in cash and short-term investments. We repurchased $433 million worth of shares in Q4, and will continue to opportunistically return capital via share buybacks. In summary, quarter four capped off another year of healthy growth with profitability and cash flow improvement for us. On a full year basis, 2025, revenue grew 13%, gross profit grew 20%, and operating income grew in excess of 50% to deliver a full year margin of 13%. And our free cash flow generation improved by approximately 600 million to a record 2.9 billion. Looking ahead to Q1, we are forecasting 759 million MAU, an increase of 8 million from Q4, and 293 million subscribers. In Q1, which is seasonally our smallest quarter, our subscriber outlook implies net additional 3 million. This is within our historical range for Q1. The effects of new pricing implementation in Q1 are considered in our forecast and, as Alex mentioned, the churn with respect to these price increases is in line with our expectations. In addition, we remain very encouraged by the early benefits we're seeing to our funnel thanks to the enhanced free tier that we rolled out in late Q3. We are well positioned for conversion and continued healthy subscriber growth in 2026. We're also forecasting $4.5 billion in total quarter one revenue, representing an improved growth rate of approximately 15% versus the 13% we just delivered in quarter four. We're forecasting ARPA growth in the 5% to 6% range. Our revenue outlook also incorporates the effects of unfavorable currency movements, which results in an incremental $35 million headwind when compared to prior quarter exchange rates. We expect a quarter one gross margin of 32.8% and operating income of 660 million. While we do not give full year guidance for gross margin and operating margin, we are expecting both to improve in 2026. For gross margin, we expect our recent pricing adjustments to help drive revenue growth that outpaces the net content cost growth in 2026. That said, the quarterly progression of our margins could again be variable depending on the timing of disciplined investments in our core and monetization activities. Finally, we expect our free cash flow generation to meaningfully exceed what we generated in 2025, while reflecting progression towards a normalized long-term tax rate. In conclusion, we're confident in our path into 2026 and will make further progress on driving top-line growth, disciplined reinvestments, and expect improved margin and cash flow. With that, I hand it back to you, Brian.

All right, thanks, Christian. Again, if you've got any questions, please go to slido.com, hashtag SpotifyEarningsQ425. We'll be reading the questions in the order they appear in the queue with respect to how people vote up their preferences. And our first question today is going to come from Jessica Reif-Ehrlich on AI opportunities. Across all sectors, the market is acutely focused on AI and its impact on current business models. How is Spotify planning to use AI tools and applications for new and evolving product offers, and will this eventually lead to new tiers of service?

Thank you, Jessica. This is Gustav. I'll take this. And this is a big question. I'll try to keep the answer to under 30 minutes. Just kidding. I try to answer some of this up front in my prepared remarks, but I want to say one additional thing. If we just zoom out and look at what is happening right now is the typical example of what is called a macro change, right? Spotify has lived through many macro changes. And I think it's important to know that while many people are scared in times of change, this is when there is the most opportunity. If you look at Spotify, it was born out of a macro change, which was ubiquitous, cheap broadband. That's how we got to scale. And then this next huge wave came across us called the smartphone. What happened? Spotify accelerated and started growing faster. Then the next microwave came, which was called personalization. What happened? Spotify embraced it and grew even faster. Then the next thing came, which was the connected home. We all forgot about it now, but it was a big deal. What happened? Spotify started growing faster, over 2,000 integrations with hardware partners. The thing about macro change is that if you capture it, it's an opportunity, not a headwind. This is what we're focused on. And we feel very well positioned for this opportunity. As I shared in my initial remarks, the first thing to look at is, do you even have the right business model? If you look at the AI companies, the business model is subscription and increasingly ads. That's what we excel at. So we have the right business model. And I don't see that changing for the consumer space. So we feel very positioned from a structural point of view. On top of that, as I shared, we've been investing towards this opportunity for many years now. Because while it's happened faster than many people think, it was not impossible to foresee that this would happen. If you just believed in the exponential, we would get here. This is why we are leading in the market with these interactive natural language-based services in terms of media platforms. So to be specific about what I'm excited about, I am excited about us being the first truly intelligent agentic media service that you can literally talk to. And this is not just a pipe dream. You can already talk to Spotify through the AI DJ casually, but also through from the playlist in sort of a deep research way. We're going to keep investing in that. What that means structurally for Spotify is that we are building a data set that never existed, which is the data set of language to music, language to podcast and language to books. We've had the song to song data set, but no one had the language to song data set. And I want to drive home a point here, which is this is a very specific data set. You may think it is a canonical data set, meaning there is a factual answer to, for example, what is workout music? There is no factual answer to what is workout music. In fact, it turns out that taste is not a fact, it's an opinion. So if you look at something like workout music, on average, for an American, it's usually hip-hop. For a European, it's usually EDM. For many Scandinavians, it's something like heavy metal or even death metal. But then again, for a lot of Americans, millions at least, it's also death metal. So there is no canonical answer to what does workout music mean. You can't just have an LLM commoditize it as a fact the way you can commoditize Wikipedia. You actually need to have many, many hundreds of millions of listeners across the world's market constantly telling you what it means for that specific person. This is a data set that we are building right now that no one else is really building. It doesn't exist at this scale. And we see it improving every time we retrain our models. This is what I'm excited about. I think I'll stop there or I'll take the whole Q&A.

All right, our next question is going to come from Doug Ameth on gross margin. What are the drivers of gross margin expansion in 2026 and do they shift at all from recent years?

Hey, Doug, I'll take that. Alex here, and then Christian, you may jump in. I'm confident in our gross margin trajectory in terms of making progress towards our long-term goals that we've talked about before. We intend to do it in a steady and sustainable manner, and the way we're really managing our gross margin is a balance between a couple of different things. One is thoughtful monetization. Two, we want to be disciplined with reinvestment and our cost of revenue. And, of course, we're going to innovate to create even more differentiation for our platform. And if you think a bit about the last few years and look at our trajectory, I think we've got a pretty good track record in striking this very balance.

Christian here. I just want to fill in. I mean, to start with, just going back a bit to my own script, we do want to invest and we will invest in future value when we see we have that opportunity. And that is what we're doing. And creating long-term value is what we're looking for every day. But looking at the gross margin pace here in quarter four going into quarter one and also for next year and the things that drives that, I mean, what I said was that the price increases that we have done here is going to outpace the net content cost in 2026. Remembering also that we are improving our ads business slowly as we go forward, and we feel that that will pick up in the second half of 2026. We have a marketplace that added both to gross income and margin in 2025. That is also a good tool for us. And finally, as we expand new verticals within the countries that we are in and also to new countries, that is also a good support for our margin development.

All right. Our next question is going to come from Jessica Referlick again. This time on advertising. You've spent the last two years building out your ad tech platform. Can you provide a progress report? Where are you seeing the most progress and where do you have more work to do? And will there be a step change in advertising growth later this year?

Thanks, Jessica. You know, it's now one and a half years since we decided to re-engineer Spotify's ad stack and really move off of a rented stack. And we did this primarily to better match what our clients asked of us, the way they would like to buy on Spotify. And frankly, we did this also to meet and exceed the standards of really what is a high-performance, self-serving, biddable stack. It was a tough call back in that moment since I knew it meant that we had to take some pain as this was going to be deep surgery for us. I'm happy to say that we now have record levels of advertisers on the platform, and that increased density means much better yield and, as a result, more revenue growth for us. We are positive on ads. We still have work to do, but we're definitely making good progress and seeing very positive signs.

Okay. And it looks like one more question from Jessica, this time on capital allocation. Christian, can you provide an update on your views on capital returns, given your extremely strong balance sheet?

Thank you, Jessica. Yeah, well, it is a relevant question when we have now a good cash flow and we also have a strong balance sheet. We have said that before. Our primary goal is to reinvest in the business, and as we do that, we actually can increase our growth levels, and when we increase our growth levels, we can get more money to invest back and do that flywheel that Alex talked about in his script. And that is the – you have to always remember that is our first thought every day in this company, to grow the company. And as we've said, if we're going to have room for also returning something to the shareholders, we can do that. duration, we did $510 million in buybacks in the market. And that is still an option for us also going forward, especially to cover up for dilution. In addition to that, as you know, we have $1.5 billion fallen due or plus in convertible note now in March, which we will settle in cash.

Okay, our next question comes from Eric Sheridan on AI opportunity. Can you discuss your latest thoughts with respect to AI on one, its role in product and platform evolution for the company? Two, its effect to transform your internal processes? And three, the broader audio content creation and distribution landscape?

Thank you, Eric. This is Gustav. I think I touched on a lot of this in my opening remarks, but I'll summarize it briefly. In terms of its role in product development, as I said, you can actually already see that we spent a lot of last year rebuilding the company for an agentic age so that you can launch these services where a user can now ask Spotify a question in English that would have required you to be a senior developer at Spotify to be able to answer before. A year ago, only a very senior developer at Spotify could answer the question of what was the first track I ever listened to on Spotify. Please take the ones I listened to more than three times and match them against what was popular at the time. Now anyone can do that, just using English. So we've been spending time rebuilding the company for this age before. It's a little bit late to start now. You should have started about two years ago, which we did. And now you're starting to see the products on top of this rollout. And as I teased... We really want to be the world's first truly intelligent media platform. You will hear us talk more about this at the Investor Day, so I won't share many more details now, but stay tuned for that. In terms of transformation of internal processes, I did briefly share in my prepared remarks this tool called Honk, where you can, using cloud code, literally... on the bus or the train, just ask Claude to add a feature or a bug to, for example, the iOS code base. It will push a QR code back to you so that you can actually try the app with that feature. If you like it, you can merge it to production without even getting off the bus. This is speeding us up tremendously. Now, we foresee this not being the end of the line in terms of AI development, just the beginning. I'm not going to give away more secrets about how we're going to capture it, but you can be sure that we are capturing this. We're retooling the entire company for this age, and it's going to be a lot of change. But as I said before, change if you capture it is opportunity.

Okay, our next question is going to come from Rich Greenfield on AI music. What percentage of music on Spotify today is AI generated? How much AI generated content is being uploaded daily? And what is your policy on the uploading of AI music?

Thanks, Rich. This is Gustav again. We don't share a percentage of music uploaded on Spotify that is AI-generated, but I'll talk to you about how we think about it. The way we think about it is, from a creative point of view, Spotify should not decide what kind of tools you're allowed to use. Are you allowed to use an electric guitar, a synthesizer, digital audio workstation, or AI, or more... a more complicated question, a bit of AI, like 1% AI, 15, 20, 100. We don't think it's our decision to make. What we do think, though, is that consumers would like to know and understand what tools were used in the creation of their music. So we've been working with the industry to allow them... creators and labels uploading music to put in the metadata how it was created so that we can surface this to users. And you just recently saw a feature called About the Song that we launched that literally tells you about the song, what the internet is saying. But as creators start adding this data, we can also tell the consumers how this song was made because we think people want to know. So that's how we think about it. I also want to mention that One thing that AI can do is to accelerate the amount of spammy tracks. I want to be clear that there has always been people trying to abuse Spotify because it's a big economy using spammy tracks. AI is a tool that could help accelerate that. But because it's been a problem for a long time, we've been investing more than anyone else in the industry to curb this problem. So for us, spammy AI music is not a new problem. It's just more scale on an existing problem that we actually feel we are leading. In general, As more content gets created with ever more advanced tools, this is a good thing for Spotify. As more content gets created and uploaded, the personalization problem becomes more important because now there's a bigger catalog. You need to understand individual users' tastes even better. So we see this development, and this is nothing new. When Spotify started, I think there were at most tens of millions of tracks. Now there are hundreds of millions. So the 10X explosion has already happened over the last 20 years. So this is something that we're used to. That's how we're thinking about it.

Well, we've got a follow-up and a related question from Rich. Is Spotify playing to win in AI? The bare thesis on Spotify is that Udio, Suno, Clay, and Stability not only enable consumers to create AI music, but also become DSPs that take share from Spotify, with Spotify taking a more cautious approach. Any comments on that?

Hey, Rich. Alex here. It's good to hear from you. So I spend a lot of time with the industry, the music industry, and with artists. And there isn't any doubt that everyone is optimistic about the future and that AI is an important moment for all of us. And at Spotify, we provide a service to rights holders and artists and songwriters, a service to distribute and monetize their art. And the key point here, this is a scaled service with a working business model. This is where you go to put your new songs, whichever technology or instrument or tool you use to create it. And I've done the rounds and no rights holder is against our vision. We pretty much have the whole industry lined up behind us. And like Gustav mentioned before, we want to do it in a controlled way, respecting artists and the community. And we will not do deals that aren't good for artists and ultimately Spotify.

All right. Question from Justin Patterson, also related to AI music. If you could expand a bit more on Spotify's role in AI music, do you need to invest in content creation tools? And how are you helping human creators build audiences and income streams in this environment?

Justin, my friend, you've heard Gustav talk about how more catalog and interactivity is good for users and also good for the industry. So he sort of partially answered your question already, but I'll talk to you about how AI really enhances the value of our platform. So we have in the past, including Daniel, has talked about optimizing the lifetime value for our subscribers. And that is ultimately when you accumulate all of that, what builds enterprise value for Spotify. So the question is, how does AI do that? Well, one powerful way to drive lifetime value is to increase retention. And the best way to increase retention is to increase engagement. And the number one reason to engage more with Spotify, and it happens also to be something that drives willingness to pay, is personalization. And AI, whether it's general recommendations or reinforcement learning systems, it just takes personalization to a whole new level. And thus, you have a domino sequence of how really we enhance the value of our platform as we continue to invest in AI. AI leads to better personalization. Better personalization leads to more engagement. More engagement leads to more retention. More retention leads to lifetime value. And boom, more lifetime value leads to more enterprise value.

And I would just add to this, your question of do we need to invest in content creation tools? We have all the technology and capabilities that we need since a long time. This is a tech company. So we are working with the industry to enable these opportunities.

All right, our next question is going to come from Bacha Levy on premium pricing. Following the recent U.S. price increases, how do you see the price-to-value relationship of the service relative to your competitors, and how do you expect churn to play out versus prior rounds of price increases?

Thank you, Batja, one of my favorite topics. I'm really happy with the price increases we implemented back in January of this year. There have been really no surprises at all. Churn is low and came in according to our expectations. And just as a reminder, this $1 increase is the same magnitude as the U.S. price increase that we implemented back in, I think it was June of 2024. The one important thing to point out, though, is that price increases, as you know, is one of several levers we pull for growth. And when we adjust price, we do it from a position of strength. And you know this already, but I'll say it anyway. We evaluate pricing on a market-by-market basis, and we optimize for the long-term value of our platform. And you've seen it in the last few years. We do not apply a one-size-fits-all approach to this. And to your question, ultimately what we strive to do is to always create more value than price. And that happens while we're adjusting the price points as we go.

This is the kind of value-to-price ratio we believe in.

We've got another question from Rich Greenfield, this time on Spotify culture. Curious, what's changed at Spotify in the early days following Daniel stepping back from the CEO role?

Well, this is Gustav. I'll take a stab at this. From one point of view, not that much has changed because we've kept growing market share and leading. But structurally, some things have changed because first and foremost, Alex and I are two people. So we had two direct reporting teams. And we thought long and hard about how we were going to do that. Were we going to sort of split the thing down the middle? manage our own teams have our own meetings we decided not to we decided to run this as a single direct reporting group something that we run weekly for three hours called e-team so that changed we focused even more on synchronization than i think daniel did and so we have the entire decision layer of spotify sort of the vps vp layer in this room three hours every week deciding and running and unblocking the entire company. So there's been a shift in how we operate and we focus even more on synchronization and planning. And I want to touch on this because in this age of AI, I think many companies are making a mistake. Maybe I shouldn't reveal this, but I will anyway. People feel like when you have AI, you don't need to plan anymore. I think it's actually going to be the opposite. When you have productivity on tap, What you need to have are very good plans so that these agents are highly utilized and stay busy. So being a company that can plan well and know what you want to do is actually going to become more important, not less important.

I'll lay into that a little bit. I think this shift really began more than two years ago. It was carefully planned, and to Gustav's point, we now not only synchronize across the company with all of the different teams and their leaders, but we also set targets and we land planes that are important. We are very deliberate about how we target and manage the outcomes that we want for the company and our P&L and balance sheet. And if you look at the past three years, you've seen us compound revenue growth at 17% FX neutral. We have grown gross profit by 20% on a compounded basis for three years. And what's more is that we have added 18 percentage points of operating margin and And we're now generating almost 3 billion euros for 2025 in free cash flow, which is a 17% cash margin. So all of us are super happy about this run, and we are definitely in a very strong position as a team to continue to invest and grow the future of Spotify.

All right, and another one on Rich Greenfield, this time about books. Can you help us understand why you want to be in the physical book-selling market?

Thanks Rich, this is Gustav. The reason that we are in the... First of all, I want to say that we're not holding inventory or anything like that in this business. The reason we want to be in the physical book market is because we think that it's not a separate market. It is the same book market. So one of the most common feedbacks we heard when we talk about audiobooks was people saying that... Yeah, I like it, but it's not enough. I really like reading at night or in the morning. I don't want to lie and listen to my audio book in bed because if I fall asleep, I miss it, etc. So we realized that while it technically and financially looks like a different market, we tend to focus on the consumer. And from the consumer, it's the same book, whether it's a physical book, it's on their Kindle or their audio book. So this is what drove us to, it was really the consumer that drove us to enabling this as well. So that's how we think about it. We want to do books, and that requires being in physical books as well. It doesn't really matter if the consumer bought the book themselves and then synced to the audiobook, but we want to make it super easy. If you find the book on Spotify, to not say that, well, I'm not going to listen to this book because I also want to read it. If that's the case, we're right there. You just click buy, it arrives in your home, and then you can sync it back and forth. So this is really a consumer-led innovation.

were so bullish on audiobooks there's so much upside there uh you saw us launch audiobooks in premium in recently in sweden denmark finland iceland and monaco um and um it's still very early days but the publisher's reactions to our entrance into into into the market in the audience we attract and engage have been just super positive um you heard gustav talk about audiobook recaps page smash just now and and the partnership with bookshop You know, in just two years, which is very short order, we've more than tripled our catalog to over half a million titles and expanded into 14 global markets. And there's so many more markets to go from here.

And I just want to say that we talked about raising our ambition. Now, Alex and I want to do something different. We want to build something that never existed before, rather than trying to copy something that existed. And I think books is a good example of this. We're looking at a consumer problem that no one else really looked at and said, this needs solving. We really want Spotify to be your media partner. If that requires us syncing to your physical book or your Kindle e-book, then let's just solve that.

All right, our next question is going to come from Stephen Cahal on AI opportunity and priorities. With the stock down approximately a third over the last three months, the market appears to be implying Spotify will be negatively impacted from AI. What do you think the market's missing from how Spotify can benefit from AI, and what are your top priorities so you don't fall behind within this new industry landscape?

Hi, Steven Christian here. Let me start and then hand over to Gustav, but I think it's been notable listening to today's discussion and also seeing the last quarter, of course, that AI has been something that has been hard to grasp for many people. We don't comment on our share price when it changes like in this short term and so on, and we will not do that going forward. But it's obvious from the recent months, but also from the discussion today, I would say, and all the questions we get, that AI is something that is interesting and will have an impact. And I think hopefully we have discussed and explained why this is a great opportunity for us. And as Gustav said before, we didn't start now. We started many years ago. And if you haven't, you probably will have a tougher time. And that's why we think this is a great opportunity. I hand it over to you, Gustav.

I won't say that much more, but Alex here told me that the Chinese sign for macro wind is opportunity. So we're going to try to capture that opportunity. I want to be clear. So we're going to invest, but we're going to invest with discipline when we see clear opportunities and returns.

All right. We've got a question now from Doug Ameth on our new free tier. When should Spotify see easing headwinds to subscriber conversions from the recent free tier announcements with a shift towards increasing conversions and subscribers? How does this impact the trajectory of both 2026 MAU and premium subs?

Well, Doug, we just came off of a really good quarter when it comes to both MEU and premium subs. So I am very, very encouraged about the 2026 growth of these two metrics. You know, we are seeing strong engagement uplift, not just in our new enhanced free tier around the world, but also generally for Spotify. And this was one of the major contributors to us adding 38 million users in Q4. You know, when you fix the – it's sort of like a leaky bucket. When you start plugging the holes, the level of the water will just rise faster. And this is perhaps the most important leading indicator to growth at Spotify. It's been so in the past 15, 16 years that I've been here. If engagement goes up, it means user growth will increase. And ultimately, this has downstream impact on the overall Spotify business, including subscribers and other monetization.

All right. Thanks, Doug. Another question from Justin Patterson for Gustav on AI. How is agentic coding changing product velocity? What do you believe gen AI could mean for engineer productivity and R&D investment needs?

Thanks for the question, Justin. Well, I would say that I think it's obvious to everyone, but over Christmas, Christmas this year was an event, a singular event in terms of AI productivity. Certainly, I spent my entire vacation coding rather than being on holiday, and I think most people in tech did. A lot of things happened in December, including Opus 4.5 coming out to cloud code. And we crossed the threshold where things just started working. So a lot has actually changed very recently. And when I speak to my most senior engineers, the best developers we had, they actually say that they haven't written a single line of code since December. They actually only generate code and supervise it. So it is a big change. It is real, and it's happening fast. Now, as I said, we've discussed for the last at least one and a half years, not if this should happen, but when it should happen. And we've started building systems like Honk that I explained for this type of world. So I feel very well positioned to capture this. But I want to be clear, this is the beginning of the change. There's going to have to be a lot of change in these tech companies if you want to stay competitive. And we are absolutely hell-bent on leading that change. But it will be painful for many companies because I think engineering practices, product practices and design practices will change. And the tricky thing right now is that if this was the end of the change, you could say this is what happened. Now let's let's retool for this. The tricky thing is that we're in the middle of the change. So you also have to be very agile. The things you build now may be useless in a month. because it may be provided by one of the big engines, etc. On the other hand, it's getting so cheap to write code, so you should probably do it anyway. So I think what it's going to mean at the end of the day is that software companies will start producing enormously more amount of software. If you go back, there is this fear that software companies are not going to exist anymore. Everyone rolls their own products. I certainly don't think that's going to be true for consumer products. I think what will happen is something more like what happened with the Internet. When the Internet came along, everyone thought that we would all have our own web pages. What actually happened was there ended up being very few web pages. In times of lower friction, things actually tend to aggregate, not disaggregate. That's the opportunity we see in front of us. I think companies such as us are simply going to produce massively more software up until our limiting factor is actually the amount of change that consumers are comfortable with.

All right, we've got time for just a few more questions. We're going to go now to Stephen Cahal on gross margin. With premium ARPU set to accelerate for much of 2026, how should we think about premium and total margin expansion? Your Q1 margin guide already implies improvement versus the typical seasonality, so can we expect a stronger year for margin expansion than we saw in 2025? So, thank you, Stephen.

As you know, which I've said already, we don't give full year guidance on our gross margin. But you're right. I mean, we move into quarter one with an ARPA growth of 5%, 6%. That's a bit faster than we have reported in quarter four. And it incorporates recently announced price increases in the market like U.S., And that will flow through our P&L for a portion of the quarter and will improve a bit. But that said also, we have said it repeatedly and I will say it again, which is very important, except for that we're not guiding on full year gross margin. is that we actually do invest when we see an opportunity for long-term value. And that said, then, the quarterly progression of our margins could again be variable depending on the timing of discipline investments in our core and the monetization activities that I just mentioned. So keep that in mind. And as we say, we do believe that gross margin and operating margin will improve in 2026.

All right. Our last question is going to come from Bacha Levy, also related to AI opportunity. Back in October, you had announced partnership with the major labels to develop artist-first AI products. With all the hype about competition and disruption, can you talk about how you plan to differentiate with these products, and is there an urgency to launch them?

This is Gustav. I'll start and maybe Alex wants to jump in. No, we're not going to ship ideas. We're not going to ship what we're going to do in the future. That wouldn't be very good for all of you shareholders. But what I will tell you is that, as I said in my prepared remarks. We think of it in two ways, net new music and derivatives. In terms of net new music, there are tons of companies that allow you to create music using AI. But that's not where the music breaks. That music, if it breaks, breaks on Spotify. That's where charts, that's where the cultural moment is. So we feel very comfortable about that position. A growing catalog has always been good for Spotify. Now, in terms of the derivatives, as I said, we think this is an untapped opportunity for artists to make money off of their existing IP. We have the technology and capabilities that we need, and we're very excited about it. And we are ready for the partners that are hungry to seize this opportunity. We think the ones that move first will benefit the most. So we're hungry and excited. We're not particularly stressed about it. But we're there for people who want to make money.

All right. Thanks, Gustav. And thanks, Badja. That concludes our Q&A session. I'm going to turn the call over now to Alex for some concluding remarks.

Thank you, Brian. So from any vantage point at Spotify, there is a lot to look forward to. In March, we'll kick off our 20th anniversary at South by Southwest. And we are excited to share more about our year of raising ambition and a longer-term vision at our Investor Day on May 21 of this year in New York. So please hold the date. Gustav, Christian, and I are looking forward to seeing you there.

All right. And that concludes today's call. A replay will be available on our website and also on the Spotify app under Spotify Earnings Call Replays. Thanks, everyone, for joining.